Consumers Not Required To Arbitrate Warranty Claims With Car Dealers

A federal appeals court handed car owners a victory by striking down a requirement that they arbitrate warranty disputes with dealers. Reversing a lower court ruling, the 9th U.S. Circuit Court of Appeals agreed with a Porsche 911 Turbo owner that her sales contract requiring her to submit warranty claims to mandatory arbitration violated the federal Magnuson-Moss Warranty Act, which governs consumer product warranties. “Written warranty provisions that mandate pre-dispute binding arbitration are invalid,” Judge Stephen Reinhardt wrote for a two-one panel of the 9th Circuit.

This decision is at odds with rulings by two other federal appeals courts that upheld similar arbitration clauses. That raises the prospect that the decision may be reconsidered by the 9th Circuit, or appealed to the U.S. Supreme Court. The Plaintiff, Diana Kolev, said Porsche refused to repair her $92,000 Porsche under warranty after it began suffering from a stalling engine, suspension problems, a loose shifter and a foul smell coming from its interior vents.

In his opinion, Judge Reinhardt wrote that Congress authorized the Federal Trade Commission to adopt rules governing warranties, and that it was “reasonable” for that agency to strike down binding arbitration under a different law. The law’s purpose is “to protect consumers from predatory warrantors” and shield them from “involuntary agreements that they cannot negotiate,” the judge wrote.

Citing this and other factors, Judge Reinhardt also rejected decisions by the U.S. Courts of Appeals for the Fifth and Eleventh Circuits that the warranty law does not interfere with another federal law, the Federal Arbitration Act, that encourages courts to enforce arbitration agreements. The judge distinguished an April ruling by the Supreme Court in favor of AT&T Inc. that upheld arbitration agreements under the FAA. Judge Reinhardt said that ruling was intended to enhance efficiency rather than promote consumer interests. The Ninth Circuit returned the Kolev case to the federal district court in Santa Ana, Calif., for further proceedings.